For years, by including language in account agreements, banks have been able to apply funds deposited at their institution – funds that would otherwise be controlled by the account holder’s payable on death (POD) designation – directly to a decedent’s outstanding debt owed to that institution, without any need to file a claim (in court or in otherwise).
The following is an example of such a set-off provision, which may be found in an account agreement:
Upon the occurrence and during the continuance of any Event of Default the Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under any Loan Document, irrespective of whether or not the Lender shall have made any demand under such Loan Document and although such obligations may be unmatured. The Lender agrees promptly to notify the Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lender under this section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Lender may have (italics added).
Now, under new legislation being proposed in the State Assembly and State Senate (AB 596/SB 596), banks would be able to take such funds at the decedent’s death and apply them to the depositor’s debt at their institution
even without contract language with the depositor.
Section 8 of Assembly Bill 596/Senate Bill 596 would create new Wis. Stat. section 705.06(2m), providing as follows:
705.06 (2m) If a financial institution has any lien right, right to setoff, or security interest in a P.O.D. account resulting from the financial institution’s loan or other extension of credit to an original payee, on the death of the original payee or the survivor of 2 or more original payees, the financial institution may retain control of all sums on deposit in the P.O.D. account to the extent necessary to exercise its lien right or right to setoff or to protect its security interest or may tender such sums to a court and seek a court determination, but shall pay any remaining balance of the sums on deposit to the P.O.D. beneficiary or beneficiaries as provided in s. 705.04 (2). This subsection applies notwithstanding any limitation on the rights of creditors under s. 705.07 (1).
Impact on Estate Plans
Whether under existing contract language or under the proposed legislation (if enacted), obviously this could have a significant negative and unforeseen effect on a coordinated estate plan.
For example, it is not uncommon to fund revocable trusts, credit shelter trusts, marital trusts, special needs trusts, or just outright gifts at death by using PODs as part of an overall plan. But imagine, for example, that instead of a client’s $50,000 certificate of deposit passing to a special needs trust for a disabled beneficiary as expressly designated in a POD, the bank decides to simply apply those funds in whole or in part to satisfy a loan or credit card balance owing to that bank, rather than having such debt satisfied through a claim filed with the client’s estate – where the debt may have been borne equally by all of the estate beneficiaries, as opposed to just by the beneficiary of the POD account.
And all because of a provision in an account agreement that the client almost certainly wasn’t aware of, or a new law that may be enacted years after the account in question was established and the POD designation made.
RPPT Section Opposes the Proposed Legislation
The State Bar of Wisconsin Real Property, Probate and Trust Law Section (RPPT) board opposes this proposed legislation.
Section members can review the RPPT section’s position on this legislation on the section’s page on WisBar.org (log in required).
RPPT section members should contact their state elective officials and advocate for the removal of this unnecessary POD legislative change. Many of our legislators don’t understand the unintended consequences of the propose change and the policy implications for their constituents.
Avoiding Unforeseen Results
Fortunately, such an unforeseen result can be avoided by taking a few simple, affirmative steps:
1) review the client’s existing PODs and how they fit in the overall estate plan (e.g., funding trusts);
2) determine whether the client has outstanding loans or balances at the same institution; and
3) if so, have the client consider whether moving the POD accounts to a different financial institution makes sense to ensure the proper, intended implementation of his or her coordinated estate plan at death. By not being held at the same institution as the debts, the set-off provision would not apply (whether by contract or by statute).
Jeff A. Goldman, U.W. 2002, is chair of the Estate and Trust Practice Group at DeWitt, L.L.P. in Madison. His practice focuses on estate planning, trust and estate administration, and trust and estate litigation. He is currently treasurer of the State Bar Real Property, Probate, and Trust Section.
This article was originally published on the State Bar of Wisconsin’s Real Property, Probate and Trust Law Blog. Visit the State Bar sections or the Real Property, Probate and Trust Law Section web pages to learn more about the benefits of section membership.